Ijarah (الإجارة)is the Arabic word for renting and is used in Islamic Finance for Leasing. The conditions of an Ijarah contract are basically the transfer of a valuable use (usufruct) while the ownership remains with the lessor with all its liabilities involved. The period of the lease needs to be clarified in the contract and during this period the payment of rent can be negotiated freely. A forward lease is unlike in sales contracts permissible. Subleases are permissible with consent of the lessor or if similar usage could be expected.
The lessor (owner) cannot pass through any liabilities to the lessee. For example, the lessee does not take over insurance or maintenance costs for example.
The classic form of a lease is an operating lease in which the bank remains the owner of the leased asset and takes it back in the end of the period.
If an Islamic bank gets approached by a customer to lease out an asset, it may expect an unilateral binding promise to lease the good, otherwise the client would be able to resign after the bank acquired the asset.
Ijarah Muntahia Bittamleek
The financial lease is known in the Western leasing industry has its closest pendant with the Ijarah Muntahia Bittamleek, the leasing which ends in ownership. This concept is a hybrid between an operating lease and a normal financial lease.
In Islamic law it would not be possible to bind two contracts such as rent and sales in one. Each needs to be clarified precisely. Further a sales contract cannot defer the transfer of ownership and the payment for it in the future. The solution is again a promiss of the lessor, binding only to him, to sell the asset to the client at a certain price in future. Also it is possible to structure a gift in the end of the period, so that the ownership is transferred without payment.
- Ijarah Albaraka, Jeddah